Sims Limited (SGM) Earnings Call Transcript & Summary

We're about to start the meeting, but before I do that, I'll just quickly go over the safety procedures for those in the room. There are no fire drills or other drills scheduled for today. So if you hear an alarm, it will be a real alarm. In the event of an alarm, please follow the instructions of the speaker, evacuate calmly using the stairs, leave your belongings behind and assemble in the designated areas. Now the designated areas are outside Jocelyn on Ada avenue, which I'm going to say is over that way or Doggett Street opposite the stairs, which you go down over there, they are the 2 assembly areas. So good morning, everyone. My name is Geoff Brunsdon. I Chair Sims Limited. It's my pleasure to welcome you to the 32nd Annual General Meeting of the company. Today, we're hosting a hybrid Annual General Meeting with the option of attending in-person or attending virtually. I'm pleased to be here, and I'd like to thank you for showing your support in joining the meeting today. We're meeting today on the beautiful ancestral homelands of the Turrbal tribe stretching North from Elimbah Creek, South to the Logan River and inland as far as Moggill. We acknowledge the care they have shown to these lands over countless generations and acknowledge their elders, past and present. Before I go further, I'd like to introduce our Board of Directors. So starting at my immediate left, our new Chief Executive Officer and Managing Director, Stephen Mikkelsen; on Stephen's left, Tom Gorman; on Tom's left, Kathy Hirschfeld; on Kathy's left, Phil Bainbridge; on Phil's left Vicky Binns; on Vicky's left, Hiro Kato; on Hiro's left, Deborah O'Toole and at the other end of the table, our Company Secretary and Chief Legal Counsel, Gretchen Johanns. We have also here in the audience today, our executive team, and they'll just raise their hands as I go through the names, John Glyde, Rob Thompson, Brad Baker, Elise Gautier, Ingrid Sinclair. We also have our joint venture partner from North America, George Adams. John and Matthew Felson -- or no, John's in the room. Thank you, John. Our joint venture partner in Australia in the LMS business. We also have our Director of Investor Relations and Joint Company Secretary, Ana Metelo and Ana today will moderate the online questions. I'm also delighted that many of our dedicated Queensland-based team have been able to attend in person today, and I wish to acknowledge the contribution of all our employees, many of whom will be listening online. Without their dedication and commitment, we would not be the great company that we are. In declaring this Annual General Meeting open, I note and request that the minutes record that a quorum is present. The notice of meeting was duly given, and I will take the notice of meeting as read. I note that Mr. [ Sam Vorig ], representing Deloitte Touche Tohmatsu, the company's auditor, is also present. He is available to answer questions. On behalf of the Board, I'd like to thank Mr. [ Vorig ] for his service. For the record, I would also like to advise that the minutes of the Annual General Meeting held on 8th November 2022 as signed as a correct record of the proceedings at that meeting. I advise that and request that the minutes record that the company has received proxies covering approximately 162 million shares. Each resolution will be put -- to be put to the meeting will be decided by a poll and I'll explain the poll procedures later. In the interest of good governance, I will advise you of the proxy situation in respect of each resolution following discussion on that resolution. I declare the poll on each resolution open. Our Annual General Meeting is an important event for Sims, allowing us to gauge -- allowing us to engage directly with you, our shareholders. We appreciate your time, feedback and support, and we value the opportunity to update you on the business. Thank you for joining us today. Chairman's address now. So fiscal year 2023 presented several challenges with geopolitical, social and economic uncertainty. Underlying earnings before interest and tax of $252.2 million was a decrease of 67% over the prior year. Despite these headwinds, operating cash flow enabled the Board to declare a final dividend while continuing to invest in our company's growth. I'm pleased to report that our company had another excellent safety performance. For the third in a row, our company experienced the lowest total recordable injury and lost time injury rates in its history. Safety continues to be our top priority. And these results don't happen without the commitment of every employee. During the year, our company also advanced its sustainability goals and is recognized by external rating agencies and indices as one of the world's most sustainable companies. Turning to strategy. We continue to progress our strategic growth and sustainability initiatives to position our business to capitalize on opportunities in a rapidly decarbonizing world. Our company has a long history of innovation with over 100 years operating in the circular economy. With growing demand for low-carbon recycled materials, we are focused on ways to increase the use of scrap in metal production by upgrading material to attract premium pricing. These innovations will help our customers reduce their greenhouse gas emissions while improving our company's bottom line. During the financial year 2023, we advanced our strategic growth plan through investment in both ferrous and nonferrous recycling in the United States. This past Friday, we completed the acquisition of the assets of Baltimore Scrap Corporation, a large metal recycler located in the United States, Northeast. We welcome all our new employees to our company. To finance acquisitions, we sold surplus land and progressed the sale of our 50% shareholding in the LMS Energy business and our remaining stake in Sims Municipal Recycling. We intend to continue to monetize underperforming, undervalued and underutilized assets within our portfolio. This strategy will enable the company to balance the need to invest in capital and need to invest capital in the business to achieve our strategic objectives with appropriate shareholder returns. Despite external volatility, the fundamentals that underpin our business are positive, and strongly position Sims for success over the medium term. Our disciplined approach to execution of our strategic plan is intended to create significant value for shareholders, our employees and the communities where we operate for many years to come. During the financial year 2023, the company paid $123.6 million in underlying net profit to shareholders through dividends. The company declared a final dividend of $0.21 per share fully franked. That -- this takes the total dividend for the financial year to $0.35 per share. Sustainability is at the core of our business and the company's purpose to create a world without waste to preserve our planet guides all that we do. Our sustainability efforts were recognized again this year by external rating agencies and various sustainability indices. Amongst other accolades, Sims Limited debuted on the FTSE4Good Index, returned to the Dow Jones Sustainability Australia Index, and was ranked 14th on the 2023 list of the world's most sustainable companies by Corporate Knights. Last 12 months has been a period of significant change. As announced during the financial year, Heather Ridout retired from the Board to take up the post as Australia's Consul-General in New York. I want to acknowledge Heather's leadership, guidance and wisdom through her 11 years of service. Her contribution has been a major factor in the company successfully navigating a demanding international growth strategy as well as significant change. Both the Board and executive leadership team will miss Heather's counsel, and we wish her every success in her new role. Since year-end, there have been several changes that I would like to highlight as well. Firstly, the retirement of Alistair Field and the appointment of Stephen Mikkelsen, who assumed the role of Managing Director and Chief Executive Officer on the 1st of October. I'd like to record the Board's deep respect and admiration for Alistair, who is pivotal in establishing the company's purpose and setting the strategic framework that followed. The cultural transformation achieved under Alistair's leadership will be his lasting legacy. At the same time, I'm excited to welcome Stephen Mikkelsen. He has a deep understanding of our industry. In his prior role as the company's Chief Financial Officer, he was intimately involved in setting the company's strategic framework and in building the resilient business that Sims is today. Georgia Nelson will retire at the conclusion of today's Annual General Meeting. Georgia's many contributions to this Board are significant. Her calm and considered advice was pivotal as we navigated challenging situations and difficult decisions over her tenure. Her leadership as the inaugural chair of the Risk Committee has established a strong and sustainable risk culture in the company. Georgia, for your guidance and unfailing dedication over the past 9 years, I thank you. I'm pleased to introduce Kathy Hirschfeld, who has been appointed to the Board -- who was appointed to the Board in September and is up for reelection at this meeting. As well as being a values-driven individual, Kathy brings a diversity of executive and Board experience that fits well with the strategic initiative Sims is pursuing. As I indicated at last year's Annual General Meeting, I will not be standing for reelection. I retire from the Board at the end of March 2024, and I'm delighted to announce that the Board has resolved to appoint Phil Bainbridge as the fifth Chair since the company listed on the Australian Stock Exchange in November 1991. While I've never been more excited about Sims' future, navigating global commodity markets will always be challenging. But I'm certain Phil will provide the insightful leadership the company needs to continue to prosper over the years ahead. I wish you every success, Phil. Thank you for your continued support as shareholders in the company. So I'll hand over now to Stephen for the CEO's address.

Thank you, Chairman, and thank you, everybody, for joining us today at the Calile Hotel and remotely via webcast. It is a privilege to address you at our Annual General Meeting as Managing Director and CEO of Sims Limited. It is with a deep sense of responsibility that I assume this role, I acknowledge the profound duty that the Sims Limited executive team bear towards all stakeholders, including our dedicated and committed shareholders. I also want to acknowledge the invaluable contributions of my predecessor, Alistair Field. His guidance has been instrumental in shaping the organization into what it is today and providing a clear purpose, create a world without waste to preserve our planet. This purpose forms the bedrock of the value we create for our employees, communities, customers and shareholders. Furthermore, it delves deeper to shape our organizational culture, strategy and vision. I'm determined to enhance and build upon this solid foundation. Throughout my tenure at Sims as CFO, I consistently witnessed safety taking precedence in all our operations. And as CEO, I will continue to uphold this commitment to prioritize the well-being of our team members. It is, therefore, very pleasing to report that in fiscal year 2023, we reported record lows in the total recordable injury frequency rate of 1.08 and lost time injury rate of 0.19. The operational and financial performance of the company is intrinsically tied to our dedication to environmental responsibility, social impact and strong governance. This year, we continue to receive accolades from indices and rating agencies. And more importantly, we achieved significant progress in key areas of our strategy. The 3 pillars of our sustainability strategy: Operate responsibility, close the loop and partner for change, continue to guide our efforts. In fiscal year 2023, we achieved a noteworthy milestone by significantly narrowing the pay equity gap it decreased to 2.9% from 8.2% in the previous year. We also exceeded our gender diversity objective at the management level. In our commitment to adopt sustainable and environmental practices, we are delighted to report that we sourced 84% of our electricity consumption from renewable resources. We've beaten our fiscal year 2025% (sic) [ 2025 ] emissions reduction target, which was set at 23% against our fiscal year 2020 baseline by achieving a 32% reduction. We enhanced our social license framework to ensure that we can continue to build meaningful and lasting relationships with our communities. Our sustainable impact goes beyond our initiatives. It is ingrained in the very essence of our products. We recycled approximately 8 million tonnes of proprietary ferrous and nonferrous metals in the past fiscal year. This resulted in the avoidance of 11.6 million tonnes of CO2 by using recycled materials instead of raw materials, and it highlights our significant contribution to the effort of making the steel industry more environmentally friendly. The fiscal year 2023 financial results followed a very strong record sealing performance in the fiscal year 2022. Against the backdrop of subdued markets, our performance was resilient, demonstrating market and geographical diversity benefits. Underlying EBIT of $252.2 million was down 66.6% and statutory EBIT of $293 million was down 62.1%. Metal sales were down by 1.7%, while intake volumes were down by 6.7%. Ferrous and nonferrous prices have significantly retreated from the fiscal year 2022 highs and the fiscal year 2022 average, both of which are in line with the contraction across the manufacturing sector in most regions. We have managed costs, which were up 4.9% in what has been a challenging inflationary environment reasonably well. Statutory NPAT was $181.1 million or $24.2 million higher than underlying NPAT. Throughout these challenging times, we remain focused on the things within our control. We concentrated on the execution of our growth strategy, which is designed to capitalize on opportunities arising from decarbonization, infrastructure spending and technology tailwinds. Recycling capital remains pivotal as we look to divest underperforming, undervalued and underutilized assets within our portfolio and reinvest the proceeds to grow our core metal business. Our portfolio expansion included the acquisition of 2 metal recyclers in the United States, Baltimore Scrap and Northeast Metal Traders. We have also diversified surplus land and progressed on the sale of LMS Energy, Sims Energy and Sims Municipal Recycling. We completed the construction of the Sims Resource Renewal's pilot plant facility at Rocklea here in Brisbane. In Sims Lifecycle Services, we advanced our business scaling efforts by investing in automation. Moving on to our trading update. On 11th September 2023, we provided an update on market conditions and financial forecast for the first quarter of FY '24. We communicated that the challenging market conditions observed at the close of fiscal year 2023 persisted into the early months of fiscal year 2024. Furthermore, we noted that the previously resilient U.S. domestic market had shown signs of weakening. We forecasted achieving an approximately breakeven EBIT for the first quarter of fiscal year 2024. Looking forward, we anticipate a positive EBIT for the first half of fiscal year 2024, albeit modest. This is despite the challenges posed by the persistently weak market conditions. As always, this forecast is subject -- is made subject to the usual market dynamics, including timing of shipments and the final purchase price for scrap to fulfill those shipments. While acknowledging the current market conditions, we remain confident in the medium and long-term fundamentals of the business. This confidence is grounded in the following factors that will drive medium- to long-term demand for recycled metal. Firstly, a metal-intensive infrastructure spending. Secondly, global decarbonization of steelmaking, including the growth of electric arc furnaces and finally, the electrification of products that are currently carbon-intensive. Before I conclude, I would like to express my gratitude for the warm welcome and support I have received from valued shareholders, dedicated employees and Board members. Thank you very much.

Thank you, Stephen. Now to the formal proceedings of the meeting. Before moving to the various resolutions to be considered today, I would like to draw your attention to the voting and question procedures for today's meeting, which are shown on the screen. For those attending in person and are eligible to vote and speak at the meeting, you should have been issued with a yellow voting card, one like that, when you registered earlier. If you're holding a blue card, you are not entitled to vote but may speak at the meeting. If you're holding a red card, you are a visitor and not eligible to vote or to speak at the meeting. If there are any shareholders who are eligible to vote at the meeting who have not received the correct voting cards, please see a representative from the share registry Link Market Services at the registration desk. Everyone happy that I've got the correct card. Systems worked yet again. For those attending virtually, in order to vote or ask questions during the meeting, you have to register for a voting card. You can do this by clicking on the get a voting card box bottom of the website. You'll need to enter your shareholder number and post code or proxy number. Please note that only shareholders, proxy holders or shareholder company representatives may vote. Eligible shareholders will be asked to cast their vote for, against or abstain for each resolution during the meeting. Once you finish voting on all resolutions, you must submit your vote by clicking the cast vote or cast partial vote button at the bottom of the page. You will be able to edit your votes by clicking the edit card until voting is closed at the end of the meeting. You'll be given 5 minutes at the end of the meeting to finalize your voting. A countdown time will appear at the top of the page so you know how much time is left to cast your vote. Once you've registered to vote, you will be able to ask a question during the meeting through the Ask-A-Question box at the top and bottom of the page. You can either select to ask a general question or ask a question on a specific resolution. You must select the submit question box to lodge your question. If you're asking multiple questions, please submit each question separately. I encourage shareholders who have questions to send their questions through as soon as possible. If we answer your question during the meeting and you want to reply, please do so by asking a new question. Additionally, if you request a unique pin from Link, the company's share register, prior to the meeting, and you are participating via telephone, you will have an opportunity to ask your questions in real time. After the introduction of each resolution, I'll ask for questions, and you may press star 1 on your keypad if you wish to ask the question. The moderator will introduce you to the meeting. Your line will be unmuted and you may ask your question. We will attempt to answer all questions during the meeting. But if the same or similar question is received multiple times, we will only answer the question once. Most of the questions received before the meeting have been addressed in the CEO and Chair addresses. We will now pause for a few minutes to allow shareholders time to submit questions. Please note, we will also pause briefly during each resolution for questions. We will address general questions after the pause and questions specific to a resolution during consideration of the relevant resolution. So I'll firstly ask our Head of Investor Relations. Are there any questions from the -- online?

Mr. Chairman, there are no questions.

I'll now give everybody in the room the opportunity to ask a question. Sir?

On behalf of the Australian Shareholders' Association. My name is David [ Midwood ], and I'm working with my colleague, [ Nick Bury ], who is a regular attendee and is participating from Sydney there. And with the Chair's permission, given your retirement, I would ask to read a brief statement of appreciation to the Chair.

Thank you.

The ASA regrets the decision of Chair Geoff to retire this year, that decision being considered bad news for shareholders. Knowledge -- the ASA acknowledges that during your tenure, you've moved on incompetent key management personnel and replaced the same if they didn't perform and then recruited up key -- KMP. And your determination not to tolerate bad management has improved the company's profitability over time, of course, the nature of the company's business results and its earnings in the future are subject to market conditions. Improvements implemented by the Chair have been reflected by the company's balance sheet over time and shareholders have been the beneficiaries. Likewise, nonexecutive directors recruited to serve on the Board were chosen with a view to each making a positive contribution to the operations as opposed to the Board carry on -- carrying on what might be termed as dead wood. So consequently, the ASA would like to congratulate the Chair Brunsdon for your stewardship during your time as GM Chair. For the last 20 years, the ASA has voted against the -- consistently voted against the remuneration report. Out of acknowledgment for the work that you have done, the ASA has recommended to its members and will be voting for the remuneration report out of direct respect for the Chairperson. However, acknowledging that, can we ask will SGM in future years, avoid the American-style remuneration excess, which can so often reward terrible performance by key management personnel?

Thank you, David. And [ Nick ], I know you're online, and I thank you for your very, very generous comments. The one issue I'd draw with the comments is that my retirement isn't bad news for shareholders because we have such a wonderful Chair elect in Phil Bainbridge taking over. Phil's been on the board for some time and has shown an energy and dedication to getting across our business, meeting our employees, visiting our sites and making a contribution to the working -- effective working of the Board. So that's the -- that's certainly an exception I would take. In relation to remuneration, the philosophy that we have in place here is when management does well, it's because the company does well and shareholders do well. So I'm sure that as we progress in the future, we'll seek to align remuneration with outcomes for shareholders. Are there any other questions or comments from the floor? If not, -- we'll now come to matters for consideration at the meeting today.

The first item of business on the agenda is to receive and consider the financial statements of the company and its controlled entities for the year ended 30 June 2023 and the related directors' report, directors' declaration and auditor's report. Noting that the auditors are also here. Are there any questions or discussion in relation to the accounts? David?

Thank you, notwithstanding the report that was delivered, could we aske briefly the Sims outlook for '23, '24? And with respect to the financials, are the sales revenue and NPAT predicted to either rise or fall for '23, '24?

So the CEO made a comment in the address about the outlook for the company. And Stephen, you might like to reiterate those comments.

Yes, the outlook we're providing at the moment is set for the half year 2024, so December 31, 2023, we expect to return to an EBIT -- positive EBIT contribution, but I said albeit modest. We haven't put out any further guidance for the balance of 2024. We will deal with that as we go into the second half of the year.

Thank you. Are there any other questions in relation to -- yes. Of course.

Thank you for your patience. In that respect, can I ask are you either [indiscernible] both or the new copper recycler, and forgive me for the names, Northeast Metal Traders in Philadelphia or the Baltimore Scrap are expected to be incremental earners in '23, '24 or a longer period? And are these assets expected to perform better or above the divested assets that you've just gone through in your report, please?

So we are expecting a positive contribution from both of those assets in 2023 and 2024. I think it's important to note that the assets that we have recycled in some instances, were performing well, but weren't fully valued by our shareholders and divesting them -- and I think LMS is a very good example of that, divesting LMS, it clearly more valuable to another group of shareholders than our existing shareholders, and that was the reason for that divestment, not that it was performing poorly, but it was more valuable in other hands. Of the underperforming assets, yes, we would certainly expect both Northeast Metal Traders and Baltimore Scrap to perform better than those assets that we have divested.

Any other questions or comments from the floor? As there's no more discussion, I'd ask the minutes record that the accounts and reports have been received and considered.

The next item of business is Ordinary Resolution 1, which is the reelection of Thomas Gorman as a director. Before I read the resolution and ask you to vote, I'd like Mr. Gorman to say a few words about his background and experience. Tom?